EU officials signal flexibility in Cyprus bank tax as outrage mounts

Cyprus bailout deal: EU officials signal bank tax flexibility

European policy makers signalled flexibility on the application of an unprecedented bank tax in Cyprus, seeking to overcome outrage that threatens to derail the nation’s bailout. European shares and the euro fell.

While demanding that the levy raise the targeted 5.8-billion euros (US$7.6-billion), finance officials said easing the cost to smaller savers was up to Cyprus. A vote on the tax, needed to secure 10-billion euros in rescue loans, was delayed for a second day until Tuesday. Banks will remain shut through March 20 after a holiday Monday, a government official said. Euro-area finance ministers plan a conference call at 7:30 p.m. Brussels time Monday to discuss the matter.

If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such

“If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such,” European Central Bank Executive Board member Joerg Asmussen said Monday in Berlin. “What’s important is that the planned revenue of 5.8-billion euros remain.”

While Cyprus accounts for less than half a per cent of the 17-nation euro economy, the raid on bank accounts risks triggering new convulsions in the financial crisis that began in 2009 in Greece. Moody’s Investors Service said that the move is a significant step toward limiting support for bank creditors across Europe and shows that policy makers will risk financial- market disruptions to avoid sovereign defaults.

The tax is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” Joachim Fels, chief international economist at Morgan Stanley in London, wrote in a client note.

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Scenes of Cypriots lining up at cash machines raised the spectre of capital flight elsewhere and threatened to disrupt a market calm since the ECB pledge in September to backstop troubled nations’ debt. With no government in Italy, Spain in the throes of a political scandal and Greece struggling to meet the terms of its own bailout, more turmoil could hamper efforts to end the crisis.

The Standard & Poor’s 500 Index fell 0.4% and the Euro Stoxx 50 Index slid 1% at 4:56 p.m. in Frankfurt. The euro weakened 0.9% to US$1.2957, paring a loss of as much as 1.5%.

Borrowing costs in other debt-strapped nations rose. Italian 10-year bond yields climbed 5 basis points to 4.65%. The rate on similar-maturity Spanish yields jumped 6 basis points to 4.98%. Germany led gains among higher- rated nations’ securities; the yield on its two-year notes dropped below zero for the first time since Jan. 2.

Traders ‘Aghast’

“Traders and investors are aghast at these measures,” Michael McCarthy, a chief market strategist at CMC Markets in Sydney, told Bloomberg Television.

Russian President Vladimir Putin called the tax “unfair, unprofessional and dangerous,” according to a statement posted on the Kremlin website. Russian companies and individuals have US$31-billion of deposits in Cyprus, according to Moody’s.

Russian President Vladimir Putin criticized a penalty imposed on Cyprus bank deposits, which the European Union demanded as part of a bailout plan, saying it sets a dangerous precedent.
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Cypriot banks had 68.4-billion euros in deposits from clients other than banks at the end of January. Of that, 21-billion euros, or 31%, were from clients outside the euro area, 63% were from domestic depositors, and 7% were from other nations within the euro region, according to data from the Central Bank of Cyprus.

Cypriot President Nicos Anastasiades exhorted political factions to support the deposit levy, which he pledged is a one- off measure that will avert a collapse of the financial system that in turn would have led to the country’s exit from the euro.

“A bank collapse would cause indescribable misery,” Anastasiades said in a televised address Sunday. He called the crisis the country’s worst moment since the 1974 Turkish invasion that has left the island divided.

Depositor Swap

In a bid to ease a run on banks, depositors who keep their account for two years will receive securities linked to future revenue from the country’s gas reserves, the president said.

He said he would also seek to soften the impact on savers. The potential changes include taxing deposits less than 100,000 euros at a 3% rate, while setting the levy at 10% between 100,000 euros and 500,000 euros and at 12 percent for deposits greater than that, Antenna TV reported, without saying how it got the information.

The government will propose to euro area finance ministers that deposits of less than 20,000 euros be exempt from a bank levy, two Cypriot lawmakers with knowledge of the talks said, asking not to be identified.

Proposed Levy

The levy — as of now 6.75% of all deposits up to 100,000 euros and 9.9% above that — whittled the euro-area’s bailout of Cyprus to 10-billion euros, down from an original figure of about 17-billion euros, near the size of the nation’s 18-billion-euro economy.

“Obviously, people would have preferred to pay nothing, but it’s a better deal than it could have been,” said Marshall Gittler, head of global foreign-exchange strategy at Limassol, Cyprus-based IronFX. “It’s unusual to ask depositors to take a hit, but if they hadn’t then the hit would have fallen uniquely on Cypriot taxpayers, so in a sense it’s fairer.”

Euro-area finance deputies began a conference call at 4:30 p.m. Brussels time to discuss modifying the terms of the tax and prepare for the finance ministers’ call later, according to two people familiar with the matter.

The bank tax was the alternative to imposing losses on bondholders in a so-called bail-in. That step was opposed by the Cypriot government, the European Commission and the ECB, German Finance Minister Wolfgang Schaeuble said on ARD television last night.

‘Difficult Time’

“It’s up to them to explain it to the Cypriot people,” Schaeuble said. “Clearly, the taxpayer should not be asked” to rescue banks from insolvency, he said, adding that Cyprus faced a “very difficult time” unless it accepts the tax.

Anastasiades, whose minority government took office less than three weeks ago, holds 20 seats in the 56-seat legislature. The third-biggest faction, Diko, which supported him in his February election, holds eight seats. Cyprus’s communist Akel party, with 19 seats, plans to vote no.

In Cyprus, where a poll showed 71% of Cypriots said parliament should reject the levy, the immediate effects were on display. Many cash machines ran out of money, including cooperative bank ATMs, Erotokritos Chlorakiotis, the general manager of the Cooperative Central Bank, told CYBC.

A man in the coastal city of Limassol drove a bulldozer into a bank branch to protest the levy, CYBC reported. At a cooperative-bank branch in the capital Nicosia, a sign informed customers that it was shut on instructions from the Central Bank of Cyprus. Nicos Nicolaou, 57, said he hoped his deposits would not be affected.

“All my life I never had deposits in banks because I didn’t trust them,” he said. “I only worked with co-ops.”

Andreas Andreou, a 48-year-old public servant, said he felt betrayed by Anastasiades’s concession.

“We voted for him to save us and instead he’s disappointed us,” Andreou said.